Dick Smith sets sail with Anchorage aboard

Stephen Bartholomeusz, Thursday, 27 September 2012

The Australian private equity group, Anchorage Capital, has been made an offer too good to refuse as a result of Woolworths' determination to exit the difficult electronics retail segment after about three decades of trying to find a format for the Dick Smith chain that worked.

Woolworths’ Grant O’Brien announced the decision to get rid of the business early this year and then spent much of the year in a brutal restructuring that saw about 75 stores closed and Woolworths write down the value of the business from about $440 million to a mere $20 million -- the price Anchorage has paid.

In effect, Woolworths has virtually given the business away. Indeed, given that the Dick Smith chain has, according to Anchorage, net assets of about $290 million it could be argued it has effectively paid Anchorage to take it off its hands.

The problem for Woolworths was that the chain was too small within the context of Woolworths' core businesses and was consuming too much time and attention.

The electronics category has been perhaps the hardest hit by the downturn in consumer discretionary spending and price deflation. The collapse of some chains and the restructuring of Dick Smith have seen stock being heavily discounted/dumped, which hasn’t helped the category.

The sector is also at the forefront of the growing incursions by online retailers, both locally and from offshore, with electronics increasingly being commoditised by the impact of online retailers.

Woolworths’ decision that Dick Smith represented too much effort for too modest a contribution has produced what could be an extraordinary opportunity for Anchorage.

Dick Smith had sales of more than $1.5 billion last financial year and earnings before interest and tax of $24.6 million. Given that it was in the midst of major surgery too much shouldn’t be drawn from the numbers but it did produce comparable stores sales growth of 4.3% and experienced a 15.4% surge in the final quarter.

Anchorage, chaired by veteran turnaround specialist and investor Phil Cave, has, as was speculated when he quit Myer last week, hired Myer’s former national director of store operations, Nick Abboud, as chief executive of Dick Smith. Abboud, a career retailer who had spent nearly 20 years at Myer, had been touted as a potential successor to Myer’s Bernie Brookes.

The private equity firm has taken out some extra insurance in the form of Bill Wavish, chairman of Myer when it was owned by private equity firm TPG and, like Brookes, a former very senior Woolworths executive. Wavish will be (an inevitably hands-on) non-executive director.

The sale of Dick Smith rids Woolworths of one of the few blemishes in its modern history. While some of its businesses, notably Big W, have been buffeted by the recent retail environment Dick Smith was probably the only brand where Woolworths could never achieve any consistency in performance and positioning.

While it might have bought the business cheaply, and while it does appear to be profitable, the chain will still be something of a challenge for Anchorage, which doesn’t plan any further store closures or redundancies.

It will help that Dick Smith will now be off the market and its restructuring will have ended, given that it has been a contributing factor to the woes within the sector. The impact of the collapse and the struggles of several other electronics chains and the shrinking presence of the bigger department stores chains in the segment will also help, as would any pick-up in discretionary spending.

The structure challenges posed by online retailing will, however, continue and Anchorage will need to find a way to combat them, or benefit from them. Given the price it has paid and the tough work that Woolworths has already done, however, there ought to be a lot more upside than downside from the transaction.

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